Why impairment test is important

This information sheet does not specifically address the valuation or impairment testing of these types of assets.

Where there are any indicators that assets may be impaired, a company must determine whether the carrying amount of assets exceeds the recoverable amount. This determination must also be made for intangible assets that are not amortised, such as goodwill, even if there are no indicators.

While there may be restrictions or prohibitions on upwards revaluations of particular types of non-financial assets, AASB requires the value of a non-financial asset to be written down to its recoverable amount where this is lower than the carrying amount of the asset i. The recoverable amount of an asset is the higher of its fair value less the costs of disposal and its value in use as defined in the accounting standards. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows of other assets or groups of assets.

In some cases, the recoverable amount may be assessed for individual assets. Many companies have audit committees. While the existence of an audit committee does not alter the need for directors to take responsibility for financial reports, audit committees can play an important role in the financial reporting process.

Directors and members of audit committees should question the need for, and adequacy of, asset impairment and the adequacy of related disclosures. You may also need to critically assess whether management and staff have adequate skills to deal with impairment issues. This information sheet sets out some questions that may help to do that. It is not a checklist. Rather, it is a resource that can be referred to as relevant according to the circumstances. Impairment testing often relies on estimating the value of assets by discounting estimated future cash flows using appropriate discount rates.

Although calculations supporting impairment or valuation of significant assets can be complex, you can review the cash flows and assumptions used in calculations prepared by management or experts for material assets, bearing in mind your knowledge of the business, the assets, the environment in which the company operates, and the future prospects of the business. Given the subjectivity of elements of impairment calculations, disclosures concerning uncertainties and key assumptions are generally important to users of financial reports.

Considerations may include:. It follows that not all of the matters in this information sheet will be relevant or necessary to consider in every case. In assessing the impairment of non-financial assets, directors and audit committees may consider:. A company must test non-financial assets for impairment when there are any indicators that the assets may be impaired. Paragraphs 12—14 of AASB provide a list of the minimum indicators of impairment to be considered by a company.

To ascertain the need for impairment testing, directors and audit committees may find it useful to consider the matters in Table 1. Table 1 Matters to consider to ascertain the need for impairment testing. Does the company have identifiable intangible assets with indefinite useful lives, intangible assets not yet available for use, or goodwill requiring annual impairment testing? Has performance declined since the end of the financial year, or is it projected to decline in the future?

Are there significant changes in the business or its environment now or in the future? Examples may include the following matters if significant:. Has management provided information to the board with its assessment of indicators of impairment? Is the analysis by management and the conclusions reached consistent with your knowledge of the business? To ascertain whether the company has sufficient and appropriate processes for assessing any impairment of non-financial assets, directors and audit committees may consider the matters in Table 2.

Table 2 Matters to consider when ascertaining appropriate processes. Login or Register Deloitte User? Welcome My account Logout. Search site. Toggle navigation.

Navigation Standards. Navigation International Accounting Standards. Quick Article Links. Overview IAS 36 Impairment of Assets seeks to ensure that an entity's assets are not carried at more than their recoverable amount i. Fair value: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date see IFRS 13 Fair Value Measurement Value in use: the present value of the future cash flows expected to be derived from an asset or cash-generating unit Identifying an asset that may be impaired At the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired i.

The asset is not impaired. Recognition of an impairment loss An impairment loss is recognised whenever recoverable amount is below carrying amount. The carrying amount of an asset should not be reduced below the highest of: [IAS Reversal of an impairment loss Same approach as for the identification of impaired assets: assess at each balance sheet date whether there is an indication that an impairment loss may have decreased. If so, calculate recoverable amount.

This discount rate will take into account the time value of money and specific risks related to the asset. It is a method similar to the one applied for the valuation of a company by the discounting of cash flows. Once the impairment test has been carried out, the company must record a loss on its income statement. Once the impairment loss has been recognized, the company must adjust the amortization of the following periods.

At times, the impairment of value recorded in a period may be subject to change, which is called the reversal of the impairment. These reversions are recorded as income on the income statement. The assets acquired by companies change throughout their lives and sometimes require a reduction in value.

In order for financial statements to represent the true standing of a company, companies must continuously analyze the value of their assets. While simultaneously detecting when impairment exists and then decreasing and registering the assets value. The impairment test is an analysis that must be carried out by companies so that their assets reflect their true value.

In this collaboration we are going to focus on a small portion of these accounting rules: The Impairment of Assets Impairment is the estimated loss of value of an asset. How do we determine the recoverable value of an asset?

Are you trying to determine whether your company has impairment concerns as a result of the pandemic or due to the economic environment in general? If so, did you know you might have to look at more than just the goodwill on your books, including looking at your non-financial assets — in the right order? Below we touch on the assets subject to impairment testing and the proper sequencing for performing it.

These items are broken down into two different buckets:. As noted above, there is an order to perform impairment testing.